Making the News

Tom Robinson, Economist at RGL Forensics, and Conor Quigley, QC at Serle Court, provide a guide through the maze of competition and media plurality.

In the UK, News Corp already has a huge role in the reporting of news and, hence, the way in which it is portrayed. The Sun and The Times are among the most widely read newspapers in the country and, while News Corp currently does not wield this comparable control in broadcasting, it now appears this is going to change.

News Corp’s proposed takeover of BSkyB, of which News Corp currently owns 39.1%, has come under intense public scrutiny with, initially, concerns over competition issues such as product bundling and, more controversially, issues of media plurality. The transaction was signed off by DG Competition Commissioner Joaquin Almunia, who said he was "confident that this merger will not weaken competition in the UK". 'The issue of media plurality though, he left to the UK authorities to decide - as he is obliged to do.

Merger controls

Merger controls exist to stop the formation of firms which can exploit market power and the design and accompanying analysis of mergers reflects this. Controls generally aim to assess competition in the market post merger and to establish a counterfactual—a "what if not" scenario. This method is used to determine whether the merger would lead to a "significant lessening of competition" (SLC) (UK) or represents a "significant impediment to effective competition" (EU) in a defined market.

Similar to most competition enquiries and central to the process of assessing mergers is determining the market(s) in which the firms operate. The preferred method of establishing the market is to see a hypothetical monopolist test in which the market is defined as one in which a hypothetical monopolist can raise prices profitably by a "small but significant" amount. 'The ability to do so implies that there are no viable substitutes for consumers to switch to. This process, in effect, estimates the critical elasticity of demand to determine the critical loss of the firm i.e. the loss of sales as a result of an increase in prices.

The amount of quantitative and qualitative analysis which goes into this process can be hugely significant. However, one could argue that in the case of News Corp and BSkyB, this is inconsequential as, after the EC's decision on the proposed merger, the salient point became one of whether the merger was against the public interest in the context of media plurality.

Media plurality

Media plurality is a concept with which Sky is not unfamiliar. The firm's purchase of 17.9% of ITV in 2006 attracted unwanted attention from the UK competition authorities in part for this reason. It was felt that this relatively small share of ITV would give Sky "material influence" over I TVs operations, giving rise to an SLC and negatively impacting on "internal plurality"—"the range of opinions and views within a group of media enterprises", which would have had a knock-on effect upon external media plurality.

Within the EU, the UK is unorthodox as not every merger has to be referred to the competition authorities. Rather, the merger is undertaken at the risk of the parties involved, with the Office of Fair Trading (OFT) allowed to intervene ex post several months after the merger and able to force a reversal. When Sky purchased 17.9% of ITV, the parties chose not to refer the merger to the OFT ex ante. However, the OFT and Ofcom advised the trade secretary to refer the case to the Competition Commission (CC) several months after the merger was completed.

There was considerable debate regarding media plurality, with the CC not finding cause for concern, but being subsequently overruled by the Competition Appeals Tribunal. Finally the Court of Appeal agreed with the CC that media plurality was not an issue. However, this was all academic as an SLC was found to exist as a result of the merger and Sky was forced to divest much of its stake in ITV at considerable loss.

This highlights the complexity of the issues relating to media plurality and the lack of statutory guidance available to the authorities.

In essence, however, media plurality isn't a complete departure from the usual merger analysis. The main issue to consider when examining a horizontal merger is one of market power—usually concerning the ability of the firm to exert independent control over prices or supply. Boiling it down, the principle in cases of media plurality is similar, though what is being controlled by the firms is not prices but the supply of the information which forms and informs public opinion.

Hence, if a dominant firm can set prices and/or control supply unchallenged, a dominant media firm can impose its news reporting in an equally unrestricted way. This is not to say that media plurality is dependent upon the scale of limitation of competition that is typical in investigations of merger control, otherwise it would be superfluous. Rather, what is considered is whether there are a sufficient number of media outlets to guarantee a broad selection of news services.

After its investigation, Ofcom expressed concerns over the merger of BSkyB and News Corp as the consolidation of one of the three main providers of TV news and the largest provider of newspapers in the UK would lead to News Corp’s wholesale news production audience soaring to 51%.

Core to this merger, therefore, is how the merger would manifest itself in the way in which Sky would be run editorially.

Culture Secretary Jeremy Hunt said: "It does seem to me that News Corp do control Sky already, so it isn't clear to me that in terms of media plurality there is a substantive change." Indeed, there seems to be some support for this view, not least that Sky's non-executive chairman, James Murdoch holds a concurrent role on News Corp s board and that the 39.1% of Sky owned by News Corp is far greater than the 17.9% of ITV which was deemed to give Sky "material influence" over ITV.

On the other hand, Rupert Murdoch complained in 2008 "nobody at Sky listens to me", a matter which would inevitably change if (or, as is increasingly likely, when) News Corp take full control. 'The effect upon the way in which Sky reports, therefore, is ambiguous and difficult to project as it is difficult to determine how much influence News Corp already has and so the counterfactual is not obvious.

Ofcom’s concerns meant that Hunt was minded to refer the case to the CC. He gave News Corp time to respond to this, however, and submit undertakings which may improve these conditions. News Corp offered to divest Sky News into a separate listed company as a condition at the merger, putting in place an independent board and then effectively subsidising the new company, while ensuring independence for 10 years. This undertaking has been accepted by Hunt and is now subject to a consultation period.

This is not dissimilar to the measures put in place during News Corps takeover of The Times newspaper in 1981 which stipulated that the board of The Times and The Sunday Times would include four "national figures" who would, it was hoped, represent the national interest—a move that was condemned at the time (by the Monopolies and Mergers Commission) as window dressing. Little has changed it seems. After details of the Sky News spin-off and its independent board broke, a spokesman for the Media Alliance said of the merger "We deeply regret the fact that the secretary of state is minded to clear the deal. The proposed undertaking is pure window dressing."

Interestingly, as yet there does not seem to be anything to stop News Corp from forming its own news channel to operate in addition to Sky News. Indeed. Ed Richards (Ofcom) has expressed concerns about the competition authorities being unable to tackle dynamic issues of plurality, e.g. the reduction in media plurality through expansion of undertakings rather than mergers. It is not clear, therefore, what the overall impact on plurality may be as it depends on the level of independence which Sky News is granted and the actions of News Corp owned Sky.

Commentary on the proposed merger seems incredibly polarised. What is striking though, is that much of it appears commercially motivated, whether for or against the merger. The certainty with which opinions are being expressed, however, is at odds with the complexity of the issues and this is telling. As was found in the Sky/ITV case, media plurality is not at all black and white, but an issue which must be carefully weighed and fully considered.